Chapter 21 The Theory of Consumer Choice

Test A
1

The theory of consumer choice examines a. The determination of output in competitive markets. b. The determination of prices in competitive markets. c. The tradeoffs inherent in decisions made by consumers. d. How consumers select inputs into manufacturing production processes. A budget constraint a. shows the consumption bundles that a consumer can afford. b. reflects the desire by consumers to increase their income. c. represents the bundles of consumption that make a consumer equally happy. d. shows the prices that a consumer chooses to pay for products he consumes.

. a. b. c. d.

!hich of the points on the graph shown reflects the choice of a consumer that chooses not to spend her entire income" #oint A #oint $ #oint % #oint &

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232 Chapter 21/The Theory of Consumer Choice

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!hich of the graphs shown reflects a decrease in the price of good ( only" a. panel A b. panel $ c. panel ) d. panel %

!hich of the graphs shown reflects an increase in income" a. panel A b. panel $ c. panel ) d. panel % A+,!&-. d. panel % T/#&. 0 1&/1. 2 ,&)T34+. 1 4$5&)T36&. 1 2-A#H 74-0AT. 0 89&,T34+ 3+,T-9)T34+. -A+%40. +

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Chapter 21/The Theory of Consumer Choice 233

:

The slope of the budget constraint is determined by the a. level of income of the consumer. b. relative price of commodities represented on the axes. c. preferences of a consumer. d. endowment of productive resources. A+,!&-. b. relative price of commodities represented on the axes. T/#&. 0 1&/1. % ,&)T34+. 1 4$5&)T36&. 1 -A+%40. /
;

)onsumer preferences are typically represented by a. cost curves. b. supply curves. c. indifference curves. d. budget constraints. A+,!&-. c. indifference curves. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 1 -A+%40. /

<

$ased on the figure shown which of the following statements is correct" a. #oint A is valued the same as point ). b. #oint $ is valued the same as point &. c. The bundles along indifference curve 31 are preferred to those along indifference curve 32. d. The bundle associated with point % contains more Ho=Ho>s than that associated with point ). A+,!&-. a. #oint A is valued the same as point ). T/#&. 0 1&/1. 2 ,&)T34+. 2 4$5&)T36&. 1 2-A#H 74-0AT. 0 89&,T34+ 3+,T-9)T34+. * -A+%40. +

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234 Chapter 21/The Theory of Consumer Choice

?

$ased on the figure shown@ which of the following statements is true for a consumer that moves from point ) to point %" a. The consumer is indifferent between point ) and point %. b. The consumer is definitely worse off. c. 3t is difficult to compare the level of consumer satisfaction between points % and ). d. The consumer is likely to place a higher relative value on Ho=Ho>s at point ) than at point %. A+,!&-. b. The consumer is definitely worse=off. T/#&. 0 1&/1. 2 ,&)T34+. 2 4$5&)T36&. 2 2-A#H 74-0AT. 0 89&,T34+ 3+,T-9)T34+. : -A+%40. +
1A

The slope of an indifference curve is a. constant. b. positive@ since indifference curves slope upward. c. equal to the marginal rate of substitution. d. the same as the slope of the budget constraint at every point. A+,!&-. c. equal to the marginal rate of substitution. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
11

The amount of a good an individual has a. is only affected by prices. b. is only affected by income. c. will not affect the marginal rate of substitution. d. affects the rate at which she is willing to trade. A+,!&-. d. affects the rate at which she is willing to trade. T/#&. 0 1&/1. ) ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
12

As long as a consumer is on the same indifference curve a. she is unable to decide which bundle of goods to choose. b. she is indifferent among the points on that indifference curve. c. her preferences will not affect the marginal rate of substitution. d. she is indifferent to all points which lie on any other indifference curves. A+,!&-. b. she is indifferent among the points on that indifference curve. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
1

!hen indifference curves are bowed inward toward the origin@ a. it is unlikely that consumers will be willing to engage in trade. b. people can only increase satisfaction by consuming more of all commodities. c. people are less inclined to trade away goods that they have an abundance of. d. the marginal rate of substitution decreases as a consumer moves down an indifference curve. A+,!&-. d. the marginal rate of substitution decreases as a consumer moves down an indifference curve. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
1'

The highest indifference curve that a consumer can reach is the one a. farthest from the origin. b. that intersects the budget constraint in at least two places. c. that is tangent to the budget constraint. d. all of the above. A+,!&-. c. that is tangent to the budget constraint. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /

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Chapter 21/The Theory of Consumer Choice 235

1*

!hich of the following is +4T a property of indifference curves" a. Bower indifference curves are preferable to higher indifference curves. b. 3ndifference curves are bowed inward toward the origin. c. 3ndifference curves do not cross. d. 3ndifference curves are downward sloping. A+,!&-. a. Bower indifference curves are preferable to higher indifference curves. T/#&. 0 1&/1. ) ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
1:

!hen two goods are perfect substitutes they will have a. linear indifference curves. b. indifference curves that cross. c. indifference curves that are right angles. d. indifference curves with a positive slope. A+,!&-. a. linear indifference curves. T/#&. 0 1&/1. ) ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
1;

!hen economists describe preferences@ they sometimes use the concept of a. income. b. utility. c. prices. d. markets. A+,!&-. b. utility. T/#&. 0 1&/1. % ,&)T34+. 2 4$5&)T36&. 2 -A+%40. /
1<

An optimiCing consumer will select a consumption bundle in which the a. utility exceeds price. b. marginal rate of substitution is equal to income. c. ratio of expenditure shares equals the marginal rate of substitution. d. marginal rate of substitution is equal to the relative price. A+,!&-. d. marginal rate of substitution is equal to the relative price. T/#&. 0 1&/1. ) ,&)T34+. 4$5&)T36&. -A+%40. /
1?

At the optimum a. the budget constraint would have a slope of 1. b. it is still possible for the consumer to increase his consumption of both goods. c. the slope of the indifference curve is equal to the slope of the budget constraint. d. the indifference curve would intersect the budget constraint at its center. A+,!&-. c. the slope of the indifference curve is equal to the slope of the budget constraint. T/#&. 0 1&/1. ) ,&)T34+. 4$5&)T36&. -A+%40. /
2A

!hen a budget constraint shifts out a. the consumer is worse off. b. the consumer can now reach a higher indifference curve. c. it could only have been caused by an increase in income. d. it could only have been caused by an increase in the price of one of the goods. A+,!&-. b. the consumer can now reach a higher indifference curve. T/#&. 0 1&/1. ) ,&)T34+. 4$5&)T36&. -A+%40. /

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236 Chapter 21/The Theory of Consumer Choice

21

Assume that the consumer depicted in the graph has an income of D1A. The price of ,kittles is D1 and the price of 0E0>s is D2. This consumer will choose to optimiCe by consuming a. bundle A. b. bundle $. c. bundle ). d. bundle %. A+,!&-. a. bundle A. T/#&. 0 1&/1. 2 ,&)T34+. 4$5&)T36&. 2-A#H 74-0AT. 0 89&,T34+ 3+,T-9)T34+. 1 -A+%40. +

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Chapter 21/The Theory of Consumer Choice 23

22

3f the consumer is currently at point $ on the graph shown@ a change to point ) as a result of a decrease in the price of potato chips would show the a. price effect. b. budget effect. c. income effect. d. substitution effect. A+,!&-. c. income effect. T/#&. 0 1&/1. % ,&)T34+. 4$5&)T36&. * -A+%40. /
2

Assume that a college student purchases %iet )oke and ,nickers. The substitution effect associated with a decrease in the price of a ,nickers will result in a. only a decrease in the consumption of %iet )oke. b. only an increase in the consumption of ,nickers. c. a decrease in the consumption of ,nickers and an increase in the consumption of %iet )oke. d. an increase in the consumption of ,nickers and a decrease in the consumption of %iet )oke. A+,!&-. d. an increase in the consumption of ,nickers and a decrease in the consumption of %iet )oke. T/#&. 0 1&/1. ) ,&)T34+. 4$5&)T36&. * -A+%40. /
2'

6iolations to the law of demand are assumed to occur a. only when goods are 2iffen goods. b. commonly. c. only when the substitution effect dominates the income effect. d. All of the above are possible answers. A+,!&-. a. only when goods are 2iffen goods. T/#&. 0 1&/1. % ,&)T34+. ' 4$5&)T36&. * -A+%40. /

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23! Chapter 21/The Theory of Consumer Choice

2*

3f an in=kind transfer forces the recipient to consume more of the good than he would choose with a cash transfer of equal value@ then the recipient a. would prefer the in=kind transfer over a cash transfer of equal dollar value. b. would prefer a cash transfer of equal dollar value. c. is indifferent between a cash transfer and an in=kind transfer. d. +ot enough information about the consumer is given to answer this question. A+,!&-. b. would prefer a cash transfer of equal dollar value. T/#&. 0 1&/1. ) ,&)T34+. ' 4$5&)T36&. : -A+%40. /

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"#$%&'( c. the tra)e*offs inherent in )ecisions ma)e +y consumers. T,-&( . /&,1( 0 $&CTI1#( 1 123&CTI4&( 1 '"#01.( ,
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"#$%&'( a. sho5s the consumption +un)6es that a consumer can affor). T,-&( . /&,1( 0 $&CTI1#( 1 123&CTI4&( 1 '"#01.( ,
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"#$%&'( c. -oint 0 T,-&( . /&,1( 7 $&CTI1#( 1 123&CTI4&( 1 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 2 '"#01.( #
4

"#$%&'( +. pane6 2 T,-&( . /&,1( 7 $&CTI1#( 1 123&CTI4&( 1 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 3 '"#01.( #
5

"#$%&'( ). pane6 0 T,-&( . /&,1( 7 $&CTI1#( 1 123&CTI4&( 1 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 3 '"#01.( #
6

"#$%&'( +. re6ati;e price of commo)ities represente) on the a<es. T,-&( . /&,1( 0 $&CTI1#( 1 123&CTI4&( 1 '"#01.( , "#$%&'( c. in)ifference cur;es. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 1 '"#01.( ,
!

"#$%&'( a. -oint " is ;a6ue) the same as point C. T,-&( . /&,1( 7 $&CTI1#( 2 123&CTI4&( 1 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 5 '"#01.( #
=

"#$%&'( +. The consumer is )efinite6y 5orse*off. T,-&( . /&,1( 7 $&CTI1#( 2 123&CTI4&( 2 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 6 '"#01.( #
1>

"#$%&'( c. e?ua6 to the margina6 rate of su+stitution. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,
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"#$%&'( ). affects the rate at 5hich she is 5i66ing to tra)e. T,-&( . /&,1( C $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,
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"#$%&'( +. she is in)ifferent among the points on that in)ifference cur;e. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,
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"#$%&'( ). the margina6 rate of su+stitution )ecreases as a consumer mo;es )o5n an in)ifference cur;e. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,
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"#$%&'( c. that is tangent to the +u)get constraint. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,

15

"#$%&'( a. @o5er in)ifference cur;es are prefera+6e to higher in)ifference cur;es. T,-&( . /&,1( C $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,
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"#$%&'( a. 6inear in)ifference cur;es. T,-&( . /&,1( C $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,

1

"#$%&'( +. uti6ity. T,-&( . /&,1( 0 $&CTI1#( 2 123&CTI4&( 2 '"#01.( ,

1!

"#$%&'( ). margina6 rate of su+stitution is e?ua6 to the re6ati;e price. T,-&( . /&,1( C $&CTI1#( 3 123&CTI4&( 3 '"#01.( ,
1=

"#$%&'( c. the s6ope of the in)ifference cur;e is e?ua6 to the s6ope of the +u)get constraint. T,-&( . /&,1( C $&CTI1#( 3 123&CTI4&( 3 '"#01.( ,
2>

"#$%&'( +. the consumer can no5 reach a higher in)ifference cur;e. T,-&( . /&,1( C $&CTI1#( 3 123&CTI4&( 3 '"#01.( ,
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"#$%&'( a. +un)6e ". T,-&( . /&,1( 7 $&CTI1#( 3 123&CTI4&( 3 7'"-H 81'."T( . 9:&$TI1# I#$T':CTI1#( 1 '"#01.( #
22

"#$%&'( c. income effect. T,-&( . /&,1( 0 $&CTI1#( 3 123&CTI4&( 5 '"#01.( ,

23

"#$%&'( ). an increase in the consumption of $nicAers an) a )ecrease in the consumption of 0iet CoAe. T,-&( . /&,1( C $&CTI1#( 3 123&CTI4&( 5 '"#01.( ,
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"#$%&'( a. on6y 5hen goo)s are 7iffen goo)s. T,-&( . /&,1( 0 $&CTI1#( 4 123&CTI4&( 5 '"#01.( ,
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"#$%&'( +. 5ou6) prefer a cash transfer of e?ua6 )o66ar ;a6ue. T,-&( . /&,1( C $&CTI1#( 4 123&CTI4&( 6 '"#01.( ,